Tax Can Make Development Opportunities Not Viable

We asked JULIA HARTMAN, the Founder of BAN TACS – National Accountants Group to explain some of the tax ramifications to be aware of when deciding to develop or subdivide a property.

Are you thinking of developing the block your house sits on? If so it is important that you get the right advice before you start anything.

Sometimes the tax outcome makes the project unviable. So it is important you speak to an Accountant before you spend money on anything.

Here are some important points to consider and help to detect if your Accountant is property savvy:

If you cut off the back yard and just sell the vacant land there will be no main residence exemption at all as the exemption remains with the dwelling.

If you demolish your dwelling for the development you will lose the main residence exemption retrospectively for the whole time you owned the property.

Likewise, demolish and rebuilds can cause the same problem, losing the main residence exemption up until the time you demolish the old home.

The 50% CGT discount can apply to a newly subdivided block as long you owned the original title for more than 12 months and you are not considered to be in the business of property developing.

If you do more than merely cut off a block of land and sell it, you may be considered to be in business which means the sale is part of your normal business turn over so no 50% CGT discount on the profit from the time you committed the land to the project. An example of doing more than merely cutting off a block of land would be cutting the block of land off, but building a house on it before you sell.

If what you are doing is considered to be a business and you are selling vacant land, a new house or a substantially renovated house then you have to pay GST when you sell, this could mean you lose all your profit. A purchaser won’t pay more for the house just because it is subject to GST so the GST comes straight out of your profit.

The margin scheme will reduce the amount of GST you will pay. The catch is the buyer needs to agree to the margin scheme applying to the contract. This becomes difficult if you don’t realise GST applies until a year later when the ATO come knocking.

If you believe this article has been helpful or you have questions, please:

Julia Hartman is the founder of the BAN TACS National Accountants Group which has offices on the east and south coast of Australia, from Mackay to Adelaide.

General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.